How much carnage?

Chronic screw-ups like minimum wage schemes suggest the blather about 'compassion' is bogus.

Just how much damage do proponents of “compassion” get to inflict, anyway?

It’s an increasingly important question here in Nevada, where, whenever you turn around, someone is always mongering “compassion” to rationalize some new scheme of government confiscation or coercion.

A current example is the chant by the AFL-CIO that jacking up Nevada’s legal minimum wage is the way for the state to “fight poverty.” Testifying before lawmakers, union bosses cite Washington state as their model for what the Silver State should do.

Washington voters in 1998 approved an initiative not only raising that state’s minimum wage but also tying it to changes in the federal Consumer Price Index. AFL-CIO operatives told Washingtonians—just as they told Nevadans during last year’s campaign here—that a big hike in the minimum wage would decrease poverty.

What the record shows, however, is that the Washington law created and expanded poverty—exactly as opponents within the business community had warned!

This is all documented in clear detail in an important white paper, The Economic Impact of Washington’s Minimum Wage Law, by Richard Vedder and Lowell Gallaway, of Ohio University—on the Web at http://biz.npri.org/minimum/WAMinWageStudy.pdf .

In 1998, the year before Washington imposed its new higher minimum wage, the poverty rate in the state was 8.9 percent. Three years later, in 2001, it was 10.8 percent—reflecting an increase of over 20 percent in the actual number of Washington poor people. By contrast, nationally the poverty rate fell by a percentage point at the same time, while in Washington neighbors Idaho and Oregon the decline was even greater.

Doubters might think that Vedder and Galloway were looking at an unfairly small sample period. But the results are very similar when one begins in 1997 and 1998, the last two years before the minimum wage increase, and then continues to 2000 and 2001, after the change in law. Though poverty rates were falling elsewhere, in Washington state following its minimum wage increase they kept rising.

Indeed, a detailed examination of changes in the two-year poverty rate from 1997-98 to 2000-2001 reveals that the poverty rate rose far more in Washington than in any other state in the Union! During this period of general prosperity, only six of the 50 states had rising poverty rates—despite the 2001 recession.

Could Washington’s poverty increase still have been a mere coincidence, unrelated to the sharply higher minimum wages? That would be “at least conceivable,” write scholars Vedder and Gallaway, “if the period in question was one of economic stagnation and decline in Washington.”

Amazingly, however, during the 1997 to 2001 period real per capita personal income in the state rose 9.65 percent—significantly exceeding the national average. “The median real per capita income growth for the 50 states and the District of Columbia was 7.96 percent, suggesting that Washington’s real per head income growth was more than one-fifth larger than the typical state,” write Vedder and Galloway.

Given the fall in poverty rates occurring in most of the U.S. as real income was rising, Washington too should have seen some reduction in poverty accompanying its rising income levels.

Why did it not? Because minimum wage increases take with one hand what they “give” with the other. A government law can require that wages be raised for workers who currently making relatively low wages. But, economists point out, that may be “completely offset by the substitution effect that arises when the increased minimum wage leads to behavioral changes on the part of employers.”

Thus, minimum wage increases only reduce poverty if the “income effect” from higher wages is greater than the “substitution effect” where those same higher wages produce reduced employment. And until minimum wage proponents achieve complete totalitarian control over America’s business marketplace—outlawing any cost-saving behavior or innovation by business people—there will always be a large substitution effect following hikes in the minimum wage.

Not surprisingly, research across the 50 states and the District of Columbia consistently shows that higher-than-average rates of poverty accompany state minimum wages above the federal minimum.

Yet America’s compassion-mongers continue to lay their destructive eggs and then ignore the results. They pretend the damage they do to the poor and others doesn’t really count, since they always, of course, “mean well.”

But as Washington’s minimum wage catastrophe makes quite clear, these supposedly warm-hearted but chronic screw-ups have serious consequences in the real world.

Raising the question: How much real spirit of human concern truly lies behind these schemes?

Steven Miller is policy director for the Nevada Policy Research Institute.

Issues

Steven Miller is vice president for policy at NPRI and has been full-time with the Institute since 1997. Steven oversees public policy research, including the Institute's studies, conferences, commentaries and in-depth research projects.